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SECU. AND EXCH. COMMISSION v. ZUBRIS

United States District Court, Southern District of New York


September 10, 2003

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF, AGAINST VLADISLAV STEVEN ZUBRIS, ET AL., DEFENDANTS

The opinion of the court was delivered by: John Koeltl, District Judge

OPINION AND ORDER

The plaintiff, the Securities and Exchange Commission ("Commission" or "S.E.C."), seeks an order holding the defendant, Vladislav Steven Zubkis ("Zubkis") in contempt of the Court's June 21, 2001 Final Judgment of Permanent Injunctive and other Relief, including an order of disgorgement in the amount of $21,578,731.39, filed on June 29, 2001. The Commission originally sought a temporary restraining order ("TRO"), and after a hearing on August 11, 2003, the Commission's motion for a TRO was granted. As part of the TRO, the Court ordered a freeze on specific assets of International Brands, Inc. ("IBI")- specifically a yacht and certain escrow accounts. The court appointed a receiver to take control of the yacht. After a hearing on August 26, 2003, the TRO was extended until September 10, 2003. Expedited discovery was authorized and conducted.

Following discovery, the Commission requests an order that would: (1) require Zubkis to turn over the yacht, the escrow accounts, as well as bank accounts of Platinum Management [ Page 2]

Investments Corp. ("Platinum") and International Brands, LP ("IBI LP") to the court-appointed.receiver for liquidation; (2) extend, the current asset freeze order regarding Zubkis's remaining assets; (3) extend the Commission's authority to take expedited discovery regarding Zubkis's remaining assets; (4) continue the receiver appointment; and (5) order Zubkis to cease all de facto and official officer and director activities regarding IBI. A final hearing on the preliminary injunction was held on September 8, 2003. After reviewing the arguments made and the evidence submitted, as well as the numerous submissions of the parties, the Court makes the following findings of fact and conclusions of law.

I.

In February 2000, this Court granted the Commission's motion for partial summary judgment finding Zubkis had committed numerous violations of the federal securities laws. S.E.C. v. Zubkis. 2000 WL 218393 (S.D.N.Y. Feb. 23, 2000). The Court entered a Final Judgment against Zubkis on June 29, 2001. The judgment enjoined him from violating federal securities laws, barred him from serving as an officer or director of a public company, and ordered him to disgorge his ill-gotten gains and prejudgment interest within thirty days of the judgment. The disgorgement order totaled $21,578,731.39. That judgment was affirmed by the Court of Appeals for the Second Circuit on May 20, 2002. [ Page 3]

Zubkis has not yet paid any of the ordered disgorgement. On July 16, 2003 he resigned from his officer and director positions at IBI.

The yacht frozen by the TRO and turned over to the receiver is an eighty-seven foot, steel-hulled yacht named "Ligeia III," and it is berthed in San Diego, California. (Receiver's Interim Report dated Aug. 25, 2003 ("Receiver's Report"), at 1.) The yacht has a cloudy history, but since at least December 1999, the yacht has been held by corporations controlled by Zubkis. On December 29, 1999, the yacht was transferred by its owner, Christopher Renwick, to Platinum Management Investments Corp. ("Platinum"). Zubkis accepted the yacht on behalf of Platinum as its attorney-in-fact. (Deposition of Vladislav Steven Zubkis dated August 29, 2003 ("Zubkis Dep."), at 93.) The yacht was Platinum's sole asset, as it is now. (Id. at 104.) In March 2000, all of Platinum's stock was acquired by Kona Beverage Company, Inc. ("Kona"). (Id. at 95-96; Fourth Supplemental Declaration of John J. Graubard dated Sept. 3, 2003 ("Fourth Graubard Decl.") ¶ 6 and Ex. D.) Kona was in turn owned by Z3 Capital, and Zubkis owned at least ninety percent of the stock of Z3 Capital. (Zubkis Dep. at 96, 148) Kona had no other assets besides Platinum. (Id. at 99.) In March 2001, IBI acquired all of Platinum's stock from Kona, in exchange for 46 million shares of IBI stock. (Id. at 99-100; Fourth Graubard Decl. ¶¶ 7-8 and Exs. E and F.) Zubkis concedes that the 46 million shares of IBI [ Page 4]

Stock went to him because he owned Z3 Capital and Z3 Capital owned Kona. (Zubkis Dep. at 83.)

Zubkis now claims to hold approximately 140 million shares of IBI stock. (Zubkis Dep. at 83-84.) Although it is unclear exactly what percentage of IBI's stock Zubkis owns, Zubkis claims to-be IBI's single largest shareholder. (Id. at 85-86.) IBI's headquarters are located at Zubkis's residence. (Id. at 129.)

Since Zubkis resigned from his officer and director positions at IBI on July 16, 2003, IBI has had a succession of four separate presidents. (Deposition of William Hales dated Sept. 2, 2003 attached as Ex. C to Fourth Graubard Decl., at 32.) William Hales, the third of the four presidents, was previously IBI's senior vice president for finance; Hales testified that he was unable to describe what kind of business IBI is engaged in, the companies that IBI owns, or IBI's revenue for the last year. (Id. at 9, 23-24.) The most recently appointed chief executive of IBI is Mack Hilber, who testified that he has been associated with IBI at various times for more than five years. (Deposition of Mack Hilber dated September 2, 2003 attached as Ex. B to Fourth Graubard Decl., at 3.) However, Hilber testified that he had no knowledge respecting IBI's assets, whether IBI owned any bank accounts, or IBI's financial statements or balance sheets. (Id. at 42-43.)

The escrow accounts frozen by the TRO are held at Laurel Hill Escrow Services, Inc. The escrow accounts are owned by IBI. [ Page 5]

(Zubkis Pep. at 114-15.) Zubkis'controlled the escrow accounts until they were frozen by the Court's order, including the period after he resigned his officer and director positions at IBI, and he directed that checks be drawn on those accounts. (Fourth Graubard Decl. ¶ 9 and Ex. G.) Zubkis concedes that many of the transfers he authorized from the escrow accounts went to his wife, Alia Zubkis. (Zubkis Dep. at 129.) Records supplied by Laurel Hill indicate that the transfers Zubkis made to his wife total in the tens of thousands of dollars between May 2003 and the time the accounts were frozen.*fn1 (Third Supplemental Declaration of John J. Graubard dated Aug. 26, 2003 ("Graubard Third Decl.") ¶ 4 and Ex. A; Fourth Graubard Decl. at I 9 and Ex. G5.) Zubkis contends that, the transfers to his wife were made pursuant to an agreement he had with IBI, whereby he would draw no salary from IBI but the company would pay his living expenses, including rent and utilities at his home. (Zubkis Dep. at 129.) During the same period, Zubkis caused checks amounting to over $20,000 to be drawn on the escrow accounts for yacht maintenance and improvements. (Fourth Graubard Decl. ¶ 9 and Ex. G.)

International Brands, L.P., ("IBI LP") is a limited partnership whose general partners are IBI and Zubkis. (Zubkis Dep. at 61-62.) Account number 11555-01027 at Bank of America is held in the name of International Brands, L.P. ("IBI LP [ Page 6]

Account"). From 2001 to 2003, Zubkis directed Laurel Hill to transfer more than $200,000 from one of the escrow accounts owned by IBI to IBI LP's Bank of America account. (Fourth Graubard Decl. ¶ 10 and Ex. H.) During the same period, Zubkis directed Laurel Hill to transfer over $80,000 to his father-in-law. (Id.)

Platinum also has a Bank of America account-account number 11555-11908 ("Platinum Account"). From August 2001 until August 2003, the Platinum Account received approximately $300,000 in transfers from the escrow accounts at Laurel Hill. (Fourth Graubard Decl. ¶ 11 and Ex. I.) Between June 2001 and November 2002, Zubkis wrote checks totaling over $300,000 from this account. (Supplemental Declaration of John J. Graubard dated August 25, 2003, ¶ 10 and Ex. H.) Zubkis wrote seven checks payable to himself in the amount of $9,050. (Id.) He wrote another eleven checks payable to his wife or to cash in the amount of approximately $10,000. (Id.) More than $70,000 was used for yacht expenses and improvements. (id.)

II.

The Court of Appeals for the Second Circuit has held that, in order to find a party in civil contempt for failure to comply with an order of the court, "the court need only (1) have entered a clear and unambiguous order, (2) find it established by clear and convincing evidence that that order was not complied with, and (3) find that the alleged contemnor has not clearly established his inability to comply with the terms of the order." [ Page 7]

Huber v. Marine Midland Bank, 51 F.3d 5, 10 (2d Cir. 1995).

This Court entered a clear and unambiguous Final Judgment against Zubkis that included an order of disgorgement. The Final Judgment entered on June 29, 2001 ordered as follows:

IT IS FURTHER HEREBY ORDERED, ADJUDGED, AND DECREED that Zubkis disgorge $12,544,313.25, representing the amounts received by him from the sale of securities of the defendant Stella Bella Corporation, U.S.A., now known as International Brands, Inc., and/or securities of Z-3 Capital Corporation in violation of the federal securities laws as described in the Complaint, together with prejudgment interest of $9,034,418.14, for a total of $21,578,731.39. Zubkis shall be jointly and severally liable for a total of $7,038,901.53 of this amount together with the defendant Z-3 Capital Corporation. Zubkis shall, within thirty (30) days of the entry of this Final Judgment pay disgorgement and prejudgment interest in the total amount of $21,578,731.39 to the United States Treasury. Such payment shall be (A) made by United States postal money order, certified check, bank cashier's check, or bank money order; (B) be made payable to the Securities and Exchange Commission; (C) be hand delivered or mailed to the Comptroller, Securities and Exchange Commission, Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, Virginia 22312; and (D) submitted under cover letter that identifies Zubkis as a defendant in this action, the caption and docket number of this action, and a copy of which cover letter and payment shall be sent to Wayne M. Carlin, Regional Director, Securities and Exchange Commission, Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048.
Zubkis has not complied with the order. He does not dispute the fact that he has paid nothing to satisfy the ordered disgorgement.

The S.E.C. has thus made a prima facie showing of civil contempt. To avoid a finding of contempt, Zubkis bears the burden of proving that he is unable to comply with the disgorgement order. Huber, 51 F.3d at 10. An alleged contemnor must prove "clearly, plainly, and unmistakably" that he has a [ Page 8]

"complete inability, due to poverty or insolvency, to comply with an . . . . order'to pay court-imposed monetary sanctions . . . .;" Id, However, inability to pay is a defense only when it is impossible for the contemnor to pay any portion of the ordered disgorgement; "[o]therwise, the party must pay what he or she can." S.E.C. v. Musella, 818 F. Supp. 600f 602 (S.D.N.Y. 1993).

Zubkis plainly cannot meet this burden. He concedes that he owns approximately 140 million shares of IBI common stock. (Zubkis Dep. at 83-86.) Moreover, it is clear that IBI has certain valuable assets. IBI owns the stock of Platinum. Platinum in turn owns the yacht, which has been assessed at $450,000. (Receiver's Report at 2.) While the Commission contends that the yacht has been controlled by Zubkis personally and has been moved as part of a shell game by Zubkis to avoid capture of his assets by the Commission, there appears to be no dispute that the legal ownership of the yacht is in the name of Platinum, and that the Platinum stock is held by IBI. IBI also owns the escrow accounts and is a general partner, along with Zubkis, in IBI LP. Zubkis has caused himself and his wife to be paid substantial amounts of money over the last four months. Zubkis has transferred from the escrow accounts to his wife funds totaling at least $44,000. (Third Graubard Decl. ¶ 4 and Ex. A.) He contends that these payments have been a form of compensation. (Zubkis Dep. at 129.) In any event, it is clear that Zubkis personally received and caused his wife to receive substantial [ Page 9]

payments but paid Worthing in isa'tisf action of the outstanding order of disgorgement. Because Zubkis has the ability to pay a portion of the clear and unambiguous disgorgement order, and plainly has not done so, he is in civil contempt of this Court's prior order.

In determining an appropriate sanction for civil contempt, a court must consider: "(1) the character and magnitude of the harm threatened by the contumacy; (2) the probable effectiveness of any suggested sanction in bringing about compliance; and (3) the contemnor's financial resources and the consequent seriousness of the burden of the sanction." Dole Fresh Fruit Co. v. United Banana Co., 821 F.2d 106, 110 (2d Cir. 1987). The purpose of civil contempt is to compel obedience to a lawful order or to provide compensation to a complaining party. New York State Nat'l Pro, for Women v. Terry. 886 F.2d 1339, 1351 (2d Cir. 1989). The ultimate consideration is whether the coercive sanction is reasonable in relation to the facts. Id. at 1353.

Zubkis must turn over to the receiver all of his stock in IBI. There is no credible evidence that the value of the stock exceeds the amount of the disgorgement order. Zubkis continues to flout this Court's disgorgement order and apparently believes that he should be permitted to keep at least some ownership stake in IBI. Turn over of all the IBI stock is necessary to effectuate compliance with the disgorgement order. IBI-through its ownership interests in Platinum, the Laurel Hill escrow [ Page 10]

accounts, and the — IBI LP limited partnership-has been used as a vehicle to facilitate Zubkis's asset transfers. Zubkis concedes that he owns the IBI stock and that he has not paid anything toward this Court's order to disgorge in excess of $21 million. Because he has the ability to pay a portion of that order, he must turn over the stock to the receiver. Directing Zubkis to forfeit his stock in IBI is reasonable given his refusal over the past two years to comply with the disgorgement order, and indeed to pay anything toward satisfaction of that order. Directing Zubkis to turn over his stock to the receiver could not reasonably be considered a punitive sanction. It is merely an order to comply with this Court's prior disgorgement order. So long as Zubkis has any assets that can be used to pay down the disgorgement order against him, Zubkis is in continuing contempt of this Court's order.

Ensuring compliance with the Court's disgorgement order requires more than directing Zubkis to turn over any stock he holds in IBI. The S.E.C. has made a strong showing that Zubkis is adept at using the protections afforded by the corporate form to obscure the assets he has at his disposal.

The Court has broad equitable powers to ensure the enforcement of the disgorgement order issued in this case. "Once the equity jurisdiction of the district court has been properly invoked by a showing of a securities law violation, the court possesses the necessary power to fashion an appropriate remedy." [ Page 11]

S.E.C. v. Manor Nursing Ctrs. Inc., 458 F.2d 1082, 103 (2d ir. 1972)

An interim asset freeze is one remedy that the Court may employ to preserve the basis for a disgorgement remedy. See S.E.C. v. Unifund SAL. 910 F.2d 1028, 1041 (2d Cir. 1990); S.E.C. v. Am. Bd. of Trade. Inc., 830 F.2d 431, 438-39 (2d Cir. 1987); Manor Nursing. 458 F.2d at 1105. An asset freeze "assures that any funds that may become due can be collected." Unifund SAL. 910 F.2d at 1041. In determining whether to order a freeze of assets, the court must weigh "the disadvantages and possible deleterious effect of a freeze" against "the considerations indicating the need for such relief." Manor Nursing. 458 F.2d at 1106.

The district court may also appoint a receiver if necessary "to effectuate the purposes of the federal securities laws." Manor Nursing. 458 F.2d at 1105. The power exists "where necessary to prevent the dissipation of a defendant's assets pending further action by the court." Am. Bd. of Trade. 830 F.2d at 436. Thus, the Court may appoint a receiver when it is necessary to preserve the status quo while the Court unravels complicated business transactions to get a more accurate picture of what has transpired. Manor Nursing, at 1105.

The Court of Appeals for the Ninth Circuit has held that "the inherent equitable power of a district court allows it to freeze the assets of a nonparty when that nonparty is dominated [ Page 12]

and controlled by a defendant against whom relief has been obtained in a securities fraud enforcement action." S.E.C. v. Hickev, 322 F.3d 1123, 1125 (9th Cir. 2003). In Hickev, the court of appeals affirmed the district court's order freezing the assets of a real estate brokerage ("Brokerage") owned by the contemnor's mother. The court found that Rickey, the contemnor, controlled the brokerage and had entered into an employment agreement whereby the brokerage paid his personal expenses. The court thus concluded that "[t]he necessity of the district court's asset freeze is demonstrated by the total and complete control that Hickey exercised over the Brokerage, and by the fact that Hickey7 s only source of income was the money that he ordered paid to himself through the Brokerage from the assets frozen by the court's order. That Hickey may have been clever enough to organize a completely separate, successful entity, and construct a unique employment compensation agreement covering all of his personal expenses using corporate assets, does not put him beyond the reach of a court's powers of disgorgement." Id. at 1131-32 (emphasis in original). The court of appeals concluded that the district court acted within its discretion in freezing the assets of the Brokerage, "so long as doing so was necessary to protect and give life to the disgorgement and contempt orders already entered against Hickey." Id. at 1131.

The court of appeals in Hickey held as an initial matter that the district court is not required to find the existence of [ Page 13]

an alter ego relationship before freezing the assets of a nonparty. The court of appeals concluded that freezing assets does not constitute a "piercing" of the corporate veil: "the thrust of `piercing' is the imposition of direct liability. The district court did not hold the Brokerage liable for Rickey's disgorgement obligation or contempt payments. In other words, the district court did not order the Brokerage to pay Hickey's obligations. Instead, the district court froze the assets of the Brokerage. An asset freeze is not an imposition of liability requiring an alter ego relationship." Id. at 1130-31 (emphasis in original).

The Court determines that enforcement of the disgorgement order requires that the freeze of the yacht and the escrow accounts, previously directed pursuant to the TRO dated August 11, 2003, should remain in effect. The yacht shall remain in the control of the receiver. In addition, the Court finds it necessary to freeze the IBI LP account and the Platinum account in the same manner as the escrow accounts. In this Court, IBI, through its counsel, has argued against the seizure and liquidation of the yacht, which it has described as the most important physical asset of IBI. The Court has determined not to order the sale of the yacht until it is clearer whether there are legitimate conflicting claims to the yacht. IBI has not specifically sought any special provisions with respect to any bank accounts, and the current chief executive of IBI did not [ Page 14]

know whether IBI had any bank accounts. The Court would be prepared to make provision in any freeze order for legitimate business expenses of IBI, particularly for the costs of defense. If IBI seeks such a provision, it should make a specific application for it.

The asset freeze is required to ensure the enforcement of the disgorgement order. Zubkis's thorough control of IBI now makes it difficult to determine whether the assets held by IBI might properly be used to satisfy the disgorgement order. For example, the S.E.C. has made a strong showing that the yacht might have been purchased using Zubkis's ill-gotten funds and that IBI does not have a legitimate claim to the yacht. See S.E.C. v. Cavanauah, 155 F.3d 129, 136 (2d Cir. 1998). There is also substantial evidence that Zubkis has used the escrow accounts as well as the IBI LP and Platinum accounts for his personal use. A freeze of the yacht, the escrow accounts, and the bank accounts is necessary to ensure that Zubkis has not used IBI to shield the assets that should be used to satisfy the ordered disgorgement and to resolve any legitimate competing claims to those assets. The Commission has not demonstrated a basis to freeze the account of Mrs. Zubkis at this time.

Any detrimental effect on IBI as a result of the asset freeze will not be unreasonable in light of the necessity of uncovering the connections between Zubkis and IBI. There is in fact little reason to believe that IBI will be adversely affected [ Page 15]

by the freeze. IBI's counsel represeats that the purpose of the yacit is to provide IBI with an asset that will help the company secure a posting of its shares on a national exchange. Indeed, IBI's only active business at this time appears to be holding the yacht. IBI has not attempted to defend any interest in the escrow accounts or to argue that it needs access to those accounts. IBI should not be adversely affected if the yacht is held by the receiver rather than by IBI, at least until the yacht's status is clearly determined. Thus, the yacht should continue to be held by the receiver and not sold until any conflicting claims are resolved by further order of the Court. The escrow accounts should remain frozen until any conflicting claims to the accounts are resolved. The remaining assets in which the Commission has identified an interest by Zubkis-and which IBI has not attempted to defend-namely the IBI LP account and the Platinum account, should be frozen until any conflicting claims are resolved.

As with the original TRO, the asset freeze ordered here includes any assets owned or controlled by Zubkis. Zubkis has a continuing obligation to satisfy the disgorgement order, but he has failed to do so. An asset freeze on any assets owned or controlled by Zubkis preserves those assets for use in satisfying the disgorgement order.

The Commission is authorized to continue to conduct expedited discovery to resolve, among other things, the issues of [ Page 16]

the control of IBI and its assets, the location of other of other assets owned by Zubkis, and any competing claims to any assets.

The Commission requests a finding that Zubkis is in contempt of this Court's prior order barring him from holding any positions as an officer or director of a public company. The evidence shows that Zubkis resigned from the officer and director positions at IBI as of July 16, 2003. There is no indication that another order repeating the officer-and-director barf to which Zubkis remains subject, is necessary at this time.

The Court has considered all of the arguments of the parties. To the extent not specifically discussed above, the arguments are either moot or without merit.

Conclusion

For the reasons explained above, Zubkis is found to be in civil contempt for failure to comply with this Court's prior Final Judgment ordering disgorgement. Zubkis is directed to turn over all of his stock in IBI to the receiver by September 30, 2003. The yacht and the escrow accounts remain frozen, and the yacht will remain in the possession of the receiver. The appointment of the receiver is continued. The IBI LP account and the Platinum account at Bank of America are frozen. Expedited discovery is authorized.

SO ORDERED.


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